Don’t bank on OCR cut to help housing affordability

Opinion: The recent drop in the OCR rate will provide financial relief to many, but don't expect it to make housing more affordable, cautions Edward Yiu.

For Rent sign outside house

The Reserve Bank’s expected cut of the official cash rate by 50 basis points was greeted with considerable relief by many mortgage holders after several banks said they were lowering home loan interest rates. But can we expect the move to help housing affordability? I wouldn’t bank on it.

At least one economist said he expected mortgage rates to keep falling, which would likely lift confidence in the housing market and help stop the fall in price. This is generally assumed to be good news – unless, of course, you’re trying to buy your first home.

Promoting homeownership has long been a common policy objective for governments, as it’s seen as a way to enhance social and economic stability.

Policies aimed at easing access to mortgage finance – such as cutting mortgage rates, relaxing down-payment constraints and offering tax relief on mortgage interest – have often been introduced with the goal of increasing homeownership rates. These measures can help more people achieve the dream of owning a home, with the perceived societal benefits including financial security, wealth accumulation and the promotion of stable, responsible citizenship.

The economic (and social, and political) case for homeownership often centres on its role in fostering financial security and wealth accumulation. For many people, owning a home is the most significant financial investment they will make in their lifetime. As house prices appreciate, homeowners accumulate wealth, which can then be passed on to future generations, contributing to long-term financial stability and security.

This process of wealth accumulation is often seen as a good thing, what economists call a ‘positive externality’, meaning that it benefits individual homeowners but also society more widely. When people have a place to call their own, they are likely to care about their local community and be willing to invest in public services such as schools, roads, public safety, parks, libraries, shopping, entertainment areas and so on.

New Zealand provides a clear example of the complex and often contradictory relationship between monetary policy and housing affordability.

But in recent decades housing in New Zealand has become increasingly financialised, meaning it is treated not just as a place for people to live but as a key financial asset. This trend has been accelerated by the securitisation of residential mortgages, whereby home loans are bundled together and sold as securities in financial markets.

It has turned the housing market into an engine of economic growth, supporting not only the property development and construction sectors but also generating significant profits for the banking and finance industries.

Rising house prices boost household wealth, encourage more borrowing, and fuel further economic activity. House prices soar, affordability worsens, particularly for first-time buyers and lower-income households.

Central banks are tasked with maintaining price stability and managing economic fluctuations. They do this primarily through the setting of interest rates and other monetary tools. But using monetary policy to address issues like housing affordability can be problematic. Lowering interest rates may reduce the cost of borrowing, theoretically making it easier for households to take out mortgages. It can also fuel demand for housing, pushing up house prices making homeownership even less affordable for many, especially when real interest rates dive into a negative zone.

This can have far-reaching consequences for wealth distribution, indirectly affecting who can afford to enter the housing market and how much wealth homeowners can accumulate over time. Those who have benefited from the property market may have been able to invest in more houses, accumulating more and more wealth, at the cost of other parts of society who can not afford to buy a home to live in.

The case in New Zealand

New Zealand provides a clear example of the complex and often contradictory relationship between monetary policy and housing affordability.

Readers will remember when the Reserve Bank slashed its official cash rate to record lows during the pandemic. Mortgage lending restrictions were also relaxed to support the economy by reducing interest payments and make borrowing more accessible, stimulating economic activity in a time of crisis.

The policies may have been developed with the best of intentions, but it had unintended consequences for the housing market. With mortgage rates at historic lows but high inflation, demand for housing surged, leading to rapid increases in house prices.

As a result, housing affordability – already a significant issue in New Zealand – got worse. Instead of making it easier for households to enter the housing market, the monetary easing contributed to a housing price boom that placed homeownership out of reach for many.

The New Zealand experience illustrates the limitations of monetary policy in addressing housing affordability. While central banks can influence interest rates and credit conditions, they cannot directly control the supply of housing or the structural factors that drive long-term housing market trends.

The recent drop in the OCR rate will provide financial relief to many and ensure that those who have bought recently can make a good dent in their mortgage. But I wouldn’t expect monetary policy to improve housing affordability, and if it were used to do so it could lead to unintended distortions in the market – and not ones likely to redistribute wealth.

Edward Yiu, Associate Professor, Property, Business School.

This article reflects the opinion of the author and not necessarily the views of Waipapa Taumata Rau University of Auckland.

This article was first published on Newsroom, Don’t bank on OCR cut to help housing affordability, 18 October, 2024 

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